Description

Overview: 

This is a terrible time to be a boat OEM.  Covid caused an unexpected boom and for a couple of years OEMs could not produce boats fast enough.  In late 2022, point-of-sale demand fell off hard.  OEM sales held up for a few extra quarters (as they restocked their dealers) before hitting the wall in mid-to-late 2023. 

Fast-forward to mid-2024, retail demand remains tepid due to high prices and high interest rates.  Boat dealers still have too much inventory and higher floorplan carrying costs are unhelpful.  Moreover, there are also plenty of lightly used boats available to purchase.  Not good. 

In my estimation we are probably at the bottom of the cycle, although it is more likely to be U-shaped than V-shaped.  This coming quarter will be particularly lousy.  Fortunately, many of us are value investors that enjoy the masochism of trying to time the cyclical trough. 

Company description 

MasterCraft is a boat manufacturer with 3 brands:  Mastercraft (ski/wake), Crest (pontoon), and Aviara (luxury day boats).

The MasterCraft brand (founded in 1968) is the crown jewel of the portfolio and is the segment where the company makes most of its money. 

Thesis point 1:  The ski/wake category is an attractive niche

There are three main players:  MasterCraft, Malibu, and Nautique.  The evidence shows that this is a stable oligopoly.  Competitions often specify that participants must ride behind specific models from those three OEMs.  Like many outdoor niches, the scale brands spend on marketing, sponsor athletes, and fund innovation.  This dynamic leads to a virtuous cycle.  Market shares have been very stable over time.  In 2013, Mastercraft had 19.7% of the category, Malibu/Axis 33.0%, Nautique 16.2%.  As of 2022, Mastercraft had 20.5%, Malibu/Axis has 28.5%, and Nautique has 14.9%. 

Besides rational pricing behavior from OEMs, market share tends not to shift much because dealer relationships are quite sticky.  The dealer is very important to the end consumer because that is where their boat will be serviced.  It is easier for a dealer to have continuity for its salesforce and mechanics.  Dealers tend to stick to one brand in the ski/wake category because OEMs provide rebates based on annual volume commitments. 

Thesis point 2:  Malibu’s stumbles provide an opportunity for share gains

Up until recently, Malibu had significant customer concentration with Tommy’s Boats, a 15-location rollup of high volume, watersports-focused dealerships.  Tommy’s was an exclusive dealer and represented 23% of brand sales in 2023.  The relationship was terminated in April when Tommy’s launched a class action suit against Malibu for stuffing the channel.  Tommy’s filed for bankruptcy in May.

In the short run, this is a headwind for MasterCraft.  The creditors of Tommy’s seized ~500 Ski/Wake boats and are in the process of liquidating them into an already depressed market.  However, beyond the initial dislocation, this provides MasterCraft an opportunity for market share gains.  Malibu is having to scramble to replace Tommy’s in each geography.  Malibu is likely replacing A quality dealers with B and C quality dealers as the higher volume dealers are already embedded with a ski/wake OEM.  MasterCraft should also be able to flip some disgruntled Malibu dealers because Malibu pursued a similar channel strategy across the board.  To add insult to injury, those dealers are now competing directly with Tommy’s estate at the bottom of the cycle. 

Thesis point 3:  The stock is cheap

While near term results are going to be lousy, MCFT is very cheap on midcycle earnings power.  MCFT has 3 segments.  Corporate overhead is allocated to each segment. 

MasterCraft segment midcycle assumptions:

-          Price/Mix 10% lower than LTM  

-          16.0% EBITDA margins vs. a 10-year median of 17.3%

-          2,650 of unit sales vs. a 10-year median of 2,766

Crest segment midcycle assumptions:

-          12.0% EBITDA margins

-          Price/Mix 5% lower than LTM

Aviara:  $0.

Given the above assumptions, MCFT trades at 7.4x midcycle unlevered earnings. 

The correct value is open to interpretation but is much higher than this.  The business has strong returns on capital and grows.  Based on MCFT’s own 10-year trading history, the stock is likely to trade around $30 when earnings recover a bit. 

Another way to look at it is the private market value given we have an activist involved.  Deals in the space tend to trade for ~8x EBITDA, which is what MCFT paid for both Nauticstar and Crest.  I’d like to think Mastercraft would garner something north of 8x given its favorable attributes.  At 8x for Crest and 9x for Mastercraft the company could be worth $40+ in a sale in a few years. 

Importantly, MCFT’s CFO doesn’t think the company will operate in the red going forward, even if the end market remains weak.  Unlike Malibu, MCFT has kept its cost structure highly variable. 

Thesis point 4:  Large shareholder likely ensures capital discipline

Coliseum Capital has recently increased its position (at these levels) and now owns ~20% of the company.  It is a 13-D filer but it has not said anything publicly about its intentions.  While I have not spoken to anyone at Coliseum, my assumption is that its presence is a positive for capital allocation.  One potential move is to encourage the company to abandon Aviara (a startup boat brand that lost $8.3mm LTM).  I have not spent any time on this issue to decide if this is a good idea or not.  I just value it at $0.  But it’s something to consider if the company can’t articulate a path to profitability in a reasonable timeframe.  Another activist suggestion would be to wait 12-24 months for the cycle to recover and then to push the company to sell itself.  It is unclear that buying other non-ski/wake boat brands is a good strategy.  Most other boat categories tend to be more fragmented/competitive and have slower growth.  MCFT’s own history is mixed on this front.  Crest has been a solid acquisition.  Nauticstar (since divested for $0) was terrible.  Aviara (build vs. buy) is TBD.  I’d rather the company just run lean and buy back stock.

Conclusion:

MasterCraft has a nice market position in an attractive niche.  The company has a great balance sheet and is likely to emerge from the downturn in stronger competitive position.  With an EV <$300mm, the odds are favorable that the stock will be up nicely over the next 3-5 years. 

Catalyst

n/a